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Trickle-down or trickle-up?

By Mike Pope - posted Thursday, 12 April 2018


The federal government's rationale for tax cuts for big businesses is three-fold:

  • they enable Australian businesses to remain competitive with enterprises in countries that have already reduced company tax:
  • they increase the profitability, enabling companies to expand their activities, a process often involving capital expenditure and employment of more staff and, importantly, attracting overseas investment:
  • as a consequence, the pool of unemployed people diminishes, forcing employers to pay their staff more if they wish to retain them, or to attract new people to their workforce – the trickle-down effect.

The government has found that for some 'independent' senators, these arguments are compelling. Others senators have the view that these benefits have yet to be demonstrated. If businesses cannot compete unless they are subject to the same or very similar levels of taxation, then there'd be an incentive for all countries to have very similar rates of company tax – but this is not the case.

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Profitability is dependent on many other factors, such as access to technology and markets, availability of raw materials or cost of labour and energy. Tax concessions of the magnitude proposed by the federal government would certainly improve corporate profitability (a nice little windfall, not to be snubbed) and in a few cases may improve the viability of company operations where they are presently marginal, but it is these other factors that have a greater effect on the ability to produce goods and services at a cost that is internationally competitive.

True, in the absence of the proposed tax cuts, some large businesses will be less profitable than their counterparts in countries with lower company tax. But does this mean that they will not make a new investment in Australia or that they will move out of this country to another simply because that country offers lower tax on company profits? In a few cases this is possible – but only if another country offers better security and operating costs that are significantly lower than in Australia and where similar legal protections are available and the rule of law prevails.

The problem with the government's assurances is that they tend not to conform with the fiduciary responsibility with which all company boards are charged – to ensure that the company operates in the best interests of its shareholders. Of course it may be in the interests of shareholders that a company give a wage increase to its employees, but this is not commonly the case among larger companies, unless pressured to do so by unions offering wages negotiation – or industrial action.

Not surprisingly, none of the larger companies operating in Australia have offered an increase in remuneration for their staff if government provides them with its promised 5% cut in company tax. Some have offered to employ more people – at current wages. The boards of many companies believe that their shareholders are instead better served by offering senior management financial incentives if they achieve greater profitability. This can keep employment costs at present levels until profits rise, then a board can offer shareholders an increase in dividends or apply funds to business expansion, thereby increasing the value of shares.

Offering company executives a salary increase or bonus if they exceed key performance indicators explains why, in larger companies, there is a wide and growing gap between the salaries and allowances received by executives and and those received by other employees. Offering incentives to executives is a perfectly legal and, if successful, a prudent way of achieving company success. However, the effect is not one of trickle-down but rather trickle-up.

A cut in the tax rate paid by larger companies will increase their profitability and if they export their products, it may make them more competitive with overseas companies. What gets in the craw of lower-paid workers is that many larger companies, although very profitable, pay little or no tax in Australia, often because they can offset any profits made against losses incurred in previous years. Some, eg. our four major banks, already earn multi-billion dollar profits and are seen as, well, hardly in need of tax relief to further boost their bottom line.

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Some multinational companies operating in Australia try to minimize their taxable profits by exporting profit earned in Australia to their overseas parent company as the repayment of high -interest loans made by the parent to its Australian off-shoot, or as dividends for shareholders. Others sell their products to their parent company at prices which equate to cost of production, so that the parent company can on-sell and make a taxable profit outside Australia, often in a low-tax jurisdiction.

Giving a tax cut to companies engaging in such practices also sticks in the craw of lower paid employees. It makes them wonder why their government fails to introduce legislation that ensures all companies pay tax on monies earned in Australia and outlaws such practices as price transfers aimed at reducing their liability to pay tax in this country. The impression given is that 'looking after the "Big End" of town' is inequitable and far too high a price to pay in order to-supposedly-attract foreign investment to Australia and encourage others to expand and employ more people.

The government boasts that in 2017 its policies created over 400,000 new jobs, a milestone achieved without the need for a 5% reduction in the level of tax payable by larger companies. They also boast that overseas investment in 2015 was worth some $19 billion, largely from North America and Europe. Both of these performances were achieved without the need of a tax reduction for large and medium sized businesses.

This points to the fact that Australia is a stable democracy with an independent judiciary. It offers favorable conditions to overseas investors, including access to raw materials, stable labour costs and already-generous taxation. The government has shown itself unwilling to reform the latter and content to pursue policies that leave wages almost stagnant. It does not need to entice new investment with the prospect of tax concessions.

The government does need to ensure that new and existing investors have access to the factors of production, that these are reliable-and that taxation law is reformed so as to limit over-generous provisions and close loopholes. It also needs to encourage and support wage increases if it-and manufacturers-want to see growth in consumption and prosperity.

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Article edited by Margaret-Ann Williams.
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About the Author

Mike Pope trained as an economist (Cambridge and UPNG) worked as a business planner (1966-2006), prepared and maintained business plan for the Olympic Coordinating Authority 1997-2000. He is now semi-retired with an interest in ways of ameliorating and dealing with climate change.

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